The Finance Ministry has rejected the natural gas pricing formula suggested by the Rangarajan Committee and has instead suggested an alternative formula based on wellhead prices charged by suppliers in the region (Oman, Qatar, Abu Dhabi and Malaysia) for long-term contracts. Experts say that the prices calculated as per the alternative formula may be lower than the Rangarajan Committee figure. Wellhead prices do not take into account transportation costs — a significant price escalator in the case of Liquified Natural Gas. The ministry has made this suggestion in a note for the consideration of the Empowered Group of Ministers (EGoM) while deciding the road map for gas pricing.
The Finance Ministry’s stand of rejecting the report got support from others in the government, with the Ministry of Power and Ministry of Fertilizers outrightly rejecting the linking of domestic natural gas prices with international prices, a demand made by Mukesh Ambani-owned Reliance Industries Limited (RIL) and supported by the Planning Commission recently. Mr. Ambani had recently met the Prime Minister, Manmohan Singh and Planning Commission Deputy Chairman, Montek Singh Ahluwalia seeking international prices of around $12.5 mbtu for domestic natural gas, which is currently priced at $4.2 mbtu. The Rangarajan Committee had called for freeing of gas pricing and indexing it with international prices, which may result in the pricing coming close to the RIL figure.
On the alternative pricing formula, the Finance Ministry said if the intention is to find a solution to the unclear provision in the Production Sharing Contract (PSC) regarding “competitive arms length sales in the region for similar sales under similar conditions’’, then the appropriate action is to consider the wellhead prices of suppliers in the region for long-term contracts. The relevant suppliers in the region would be from Qatar, Abu Dhabi, Oman and Malaysia, who have supplied to India in the past.
The rejection of the report comes close on the heels of strong resistance by the Association of Power Producers (APP) who have argued that any massive hike in gas prices will lead to rise in costs of transportation run on CNG mode, hike in tariffs for power produced by number of gas power plants across the country, rise in cost of fertilizers to the farmers and a possible further hike in prices of LPG cylinders. “If the new price becomes unviable to power and fertilizer sectors, the demand for gas may slump drastically, as happened in the U.S. in 2005, and this would be against the common interests of producers and consumers alike, apart from not being in then national interest,’’ the note from Power Ministry states further.